Managerial Economics- Concepts and Importance

Managerial Economics- Concepts and Importance

Managerial economics is a special discipline that integrates economic theory with business practice for the purpose of decision making and forward planning. Managerial economics uses micro economics analysis of the business unit and macro economic analysis of the business environment.

Characteristics:

• Microeconomics in character
• Limited by macroeconomics
• Prescriptive actions
• Part of normative economics
• Multidisciplinary
• Applications in decision making
• Evaluates every alternative

Scope of Managerial Economics:

• Demand Decisions
• Cost and Production decisions
• Pricing decisions
• Profit decisions
• Capital decisions

Demand analysis - Utility Analysis, Indifference Curve, and Elasticity & Forecasting

Demand analysis:

Demand: A relation between the price of a good and the quantity that consumers are willing and able to buy per period, other things constant

Types of Demand:

• Individual and Market demand
• Market segments and  Total market demand
• Company and Industry demand
• Domestic and National demand
• Direct and Derived demand
• Autonomous and Induced demand
• New and Replacement demand
• Short run and Long run demand
• Household, Corporate and Government demand

Law of demand: The quantity of a good that consumers are willing and able to buy per period relates inversely or negatively, to the price, other things constant.

Assumptions of Law of demand: This law is based on certain assumptions, which are as follows:

• This law assumes the income of the consumer to be constant.
• Preference of the consumer is constant and he is ready to spend for it even if it is expensive.
• A change in government policies will influence demand for the product hence this law assumes a constant government policy.
• No change in size, composition and sex ratio of population.
• Change in weather conditions is also likely to affect the demand for a product. Therefore this law assumes a stable weather condition.

Exceptions to the law of demand:

• Giffen's goods: These goods can be only those which are inferior and on whom consumers spend a significant portion of their income. In this case the demand varies directly with their prices.
• Symbol of luxury: There are certain goods, which are purchased by rich people (e.g. diamonds, crystal etc.) in large amounts in spite of their higher prices. They increase such purchase in the face of rising prices as a symbol of luxury to distinguish them from common people who cannot afford them.
• Consumer's psychology: consumer judges the quality of the product by its price; the higher the price the better the quality according to this view.
• Sale during off-season: Reduction offers on certain products like refrigerators during off-reasons; yet demand is low.
• Uncertain future: When the availability of the product is uncertain in future, people may buy more of it even in the face of rising prices.
• Expectations of consumers: When prices fall, people expect it to fall further and vice-versa. Under such conditions, the purchase of the product may be postponed. Similarly when prices rise, people may expect it to rise further and purchase the product in advance. 
• Necessity: People tend to adjust their consumption on other goods if there is a change in the price as they consider them to be most urgent.

Substitution effect of a Price Change: When the price of a good falls, that good becomes cheaper compared to other goods so consumers tend to substitute that good for other goods.

Income effect of a Price Change:  A fall in the price of a good increases consumer’s real income, making consumers more able to purchase goods; for a normal good, the quantity demanded increases

Demand Schedule:  Law of demand represented in tabular form

Demand Curve: A curve showing the relation between the price of a good and the quantity consumers are willing and able to buy per period, other things constant

Demand Schedule for Chocolate
Price per Chocolate	Quantity Demanded per day
15	8
12	14
9	20
6	26
3	32

Shifts in the demand curve:

Variable that can affect market demand are

• Consumer Income
• Prices of related goods
• Consumer expectations
• Number or composition of consumers
• Consumer tastes

A change in price, other things constant, causes a movement along a demand curve, changing the quantity demanded. A change in one of the determinants of demand other than price causes a shift of a demand curve, changing demand.

Demand Determinants	Changes	Shifts of the Demand curve
Changes in consumer income	Increase in income	Shifts rightward for an increase in demand
Changes in the Prices of Other Goods
i. Substitutes	Increase in the price of product X	Shifts rightward for Quantity of product Y
ii. Complements	Increase in the price of product X	Shifts leftward for Quantity of product Y
Changes in consumer expenditure
i. Income expectations	Increase in income	Shifts rightward
ii. Price expectations	Increase in price	Shifts rightward
	Decrease in price	Shifts leftward
Changes in the number or composition of consumers	Increase in population	Shifts rightward
Changes in consumer tastes	Preferred taste	Shifts rightward